24 ★ Tuesday4 February 2020

Mohamed El-Erian

Markets Insight

Nike as in demand on the back ofw
upgrades from both UBS and JPMorgan.
“The market doesn’t fully appreciate
how Nike’s investments are working in
concert to drive industry growth, share
gain and channel mix shift benefits,” said
UBS.
The sportswear company’s investments
in product innovation, supply chain and
ecommerce put Nike “on the verge of a
new, extended period of elevated sales
growth rates” that justified a valuation of
37 times earnings rather than its current
rating of about 32 times, the broker
argued.
Gilead Sciences ose after ther
drugmaker said it was working with
Chinese authorities to test whether its
experimental antiviral used by Ebola
patients could also treat the symptoms of
the Wuhan coronavirus.
RetailerUlta Beauty ained after beingg
added to Goldman Sachs’ “buy” list.
Ulta’s recent slowdown looks cyclical
rather than structural with operating
margins intact, Goldman argued.
Goldman also cutExxonMobil o “sell”,t
citing a lack of free cash flow and
pressure on natural gas prices.
Sysco ropped after the cateringd
wholesaler’s quarterly results showed
slower organic growth.Bryce Elder

Wall Street Eurozone London

SGS, the Geneva-based testing and

certification specialist, slipped ahead of

news after the close of trading that the

von Finck family was selling a 12.7 per

cent stake to raise about $2.4bn.

The sale, which was said to be at a

possible discount of more than 11 per

cent to yesterday’s closing price, would

cut the German investors’ SGS

shareholding to about 3 per cent.

Ingenico ed the Stoxx Europe 600l

gainers after French peerWorldline

agreed to buy the payments processor

for €7.8bn.

After the closeAtos, Worldline’s parent

company, said it was selling its remaining

13.1 per cent stake.

Siemens Healthineers ropped ond

weaker than expected results with the

medical equipment maker reporting a

tough start to its new fiscal year.

Management blamed a “temporary dip”

in demand for imaging equipment and

margin pressure on diagnostics.

Rémy Cointreau ained after Bernsteing

Research upgraded the cognac maker to

“outperform”.

High exposure to China and the US as

well as a reliance on cognac should allow

Rémy to keep delivering sector-leading

revenue growth of nearly 10 per cent a

year, it said.Bryce Elder

NMC Health rashed to a three-year lowc

with traders linking the latest slide to talk

that a big shareholder was liquidating its

holding.

Th is followed NMC’s controlling

shareholders last month selling shares at

a deep discount in order to cover debts

tied to the shares — and comes after

short-seller Muddy Waters last year

attacked the group’s accounting and

corporate governance.

Selling pressure also spilled over on to

Finablr, the currency exchange specialist

founded by NMC chairmanBR Shetty.

Future allied, having been hit by ar

short-seller’s report on Friday, after the

magazine publisher said full-year results

would be “materially ahead” of market

expectations.

Ryanair ed sector peers higher afterl

beating forecasts with its third-quarter

earnings and leaving guidance

unchanged.

Virgin Money UK ained on the back ofg

an upgrade to “buy” from Investec

Securities.

Recent full-year results from the bank

contained no more bad news about

payment protection insurance refunds, it

said.

Drax, the power station owner, rose on

a Barclays upgrade.Bryce Elder

3 Chinese stocks tumble as returning
traders weigh impact of coronavirus
3 Manufacturing data turnround helps to
lift US indices
3 Pound plummets after Johnson
toughens stance on EU trade talks

Wall Street stocks bounced back despite
a sharp sell-off in the CSI 300 index after
traders in China returned from an
extended lunar new year break.
The benchmark for Shanghai- and
Shenzhen-listed equities closed down 7.9
per cent after Beijing reported 17,205
cases of the coronavirus and 361 deaths
at the weekend.
“Whether the major market sell-off is
seen as a good opportunity to buy into
Asian assets, which now look attractive
on a fundamental basis, is dependent on
how quickly the number of reported
cases plateau,” said Seema Shah, chief
strategist at Principal Global Investors.
But the longer the outbreak continued,
the more damage it would wreak on
markets, added Neil Shearing, group chief
economist at Capital Economics.
“Given the size and importance of
China’s economy, the impact on the
global economy is likely to be more
significant than in previous epidemics
(including Sars),” said Mr Shearing.
In the US, attention focused on
manufacturing data ahead of Iowa
caucuses that would indicate which
Democratic candidates were leading the

race to run against Donald Trump in

November’s presidential elections.

The S&P 500 index sprang back from

Friday’s 1.7 per cent fall after the ISM

manufacturing index rose to 50.9 last

month from 47.8 in December, signalling a

rebound for the sector.

“The story here is that the signing of

the phase-one trade deal appears to have

boosted activity,” said Ian Shepherdson,

chief economist at Pantheon

Macroeconomics.

By midday in New York, the S&P 500

was up 0.7 per cent while the tech-

leaning Nasdaq Composite rose more

than 1 per cent.

The pound slid against the dollar after

Prime Minister Boris Johnson said Britain

was prepared to walk away from trade

talks with the EU without a deal. Sterling

tumbled 1.6 per cent to $1.2986.

Brent crude’s slide that began in early

January gathered pace, the benchmark

falling yesterday as much as 3 per cent to

$54.71 a barrel. The oil price has been

knocked by the coronavirus crisis as

traders worry the outbreak could curb

demand for the commodity.Ray Douglas

What you need to know

Chinese markets sell o after return from lunar new year break

CSI  index

Source: Bloomberg











Feb  Feb



The day in the markets

Markets update

US Eurozone Japan UK China Brazil
Stocks S&P 500 Eurofirst 300 Nikkei 225 FTSE100 Shanghai Comp Bovespa
Level 3249.49 1606.98 22971.94 7326.31 2746.61 114950.23
% change on day 0.74 0.15 -1.01 0.55 -7.72 1.05
Currency $ index (DXY) $ per € Yen per $ $ per £ Rmb per $ Real per $
Level 97.703 1.106 108.710 1.301 7.024 4.238
% change on day 0.321 -0.181 0.300 -1.290 1.359 -0.814
Govt. bonds 10-year Treasury 10-year Bund 10-year JGB 10-year Gilt 10-year bond 10-year bond
Yield 1.527 -0.444 -0.061 0.532 2.837 6.511
Basis point change on day -1.370 -0.900 0.760 -1.300 -16.000 -5.100
World index, CommodsFTSE All-World Oil - Brent Oil - WTI Gold Silver Metals (LMEX)
Level 370.09 54.87 50.43 1584.20 17.89 2629.90
% change on day 0.37 -3.09 -2.25 0.38 0.90 0.09
Yesterday's close apart from: Currencies = 16:00 GMT; S&P, Bovespa, All World, Oil = 17:00 GMT; Gold, Silver = London pm fix. Bond data supplied by Tullett Prebon.

Main equity markets

S&P 500 index Eurofirst 300 index FTSE 100 index

| |||||| |||||||| |||||

Dec 2020 Feb

3040

3120

3200

3280

3360

| |||||||||||||||||||

Dec 2020 Feb

1520

1560

1600

1640

1680

| |||| |||||||| |||||||

Dec 2020 Feb

7040

7360

7680

Biggest movers
% US Eurozone UK

Ups

Gilead Sciences 4.64

Nike 4.24

Netflix 4.04

Ulta Beauty 3.95

Macy''s 3.48

Wartsila 2.80

Ses 2.30

Asml Holding 2.26

Iliad 2.06

Edf 1.93

Easyjet 3.84
Auto Trader 3.06
Scottish Mortgage Investment Trust 2.93
Diageo 2.92
Rentokil Initial 2.74
%

Downs

Nortonlifelock -39.94

Sysco -6.25

Valero Energy -4.38

Hollyfrontier -3.61

Cimarex Energy Co -3.39

Prices taken at 17:00 GMT

Thyssenkrupp -5.11

Royal Dutch Shell -2.53

Oci -2.24

Galp Energia -2.20

Deutsche Bank -1.85

Based on the constituents of the FTSE Eurofirst 300 Eurozone

Nmc Health -19.81

Polymetal Int -2.26

Royal Dutch Shell -1.84

Royal Dutch Shell -1.50

Bp -0.88

All data provided by Morningstar unless otherwise noted.

L

ast week’s fretting over the

coronavirus was a good illus-

tration of a tug of war that has

been playing out in financial

markets for a while — between

favourable sentiment and mounting

longer-term economic uncertainties.

Until now, hat contest has beent

resolved in favour of ever-higher stock

prices. But investors need to decide if

they want to opt for more of the same by

continuing to implement an investment

playbook that has served them well or if

they want to treat the viral outbreak for

what it is — a big economic shock that

could shake markets out of their “buy-

the-dip” conditioning.

Entering 2020, investors faced the

challenge of balancing favourable short-

term market technicals with weaker

fundamentals and doing so with govern-

ment bonds providing little protection

given the very low — and, in some cases,

negative — level of yields.

Thecoronavirus outbreak amplifies

two vulnerabilities — structurally weak

global growth and less effective central

banks. It is becoming harder for mar-

kets to treat such fragilities as being

beyond the immediate horizon, espe-

cially with a host of other uncertainties

not far behind, including the recurrence

of trade tension, growing realisation of

the impact of climate change, techno-

logical shocks, political polarisation and

changing demographics.

Retail, trade and travel are simple

ways to illustrate what is going on

in China. Stores are facing dramatic dis-

ruptions involving a virtual halt in traf-

fic while suppliers are finding it harder

and slower to move their merchandise,

within and in and out of the country.

There is a huge drop in travel to China,

dealinganother blow to economic activ-

itiesundermined by lessinternal mobil-

ity. This virtual stoppage of economic

activities is cascading throughout the

second-largest economy in the world

and one with considerable regional and

global ties. It is fundamentally weaken-

ing the country’s services sector at a

time of considerable challenges for

manufacturing.

With both engines of growth putter-s

ing, internal and external, China will

also find it harder to navigate its transi-

tion from amiddle-income conomy.e

The country’s increasing “sudden

stop” economic dynamics also involve

adverse spillover effects, first and fore-

most for emerging Asian economies. A

weakening China is also a problem for

Europe where the European Central

Bank is ut of productive ammunitiono

and politicians are yet to implement a

comprehensive pro-growth policy pack-

age. And with the virusaffecting the

movement of people and goods, there is

an increased risk of a multiyear process

ofdeglobalisation hat neither the glo-t

bal economy nor markets are wired for.

The coronavirus also has the potential

to constitute a structural break for mar-

kets — that is, a big enough shock that

fundamentally shifts sentiment. Previ-

ously, markets had been underpinned

by the belief that central banks were

willing and able to repress volatility and

boost rices. That fuelled investors’ fearp

of missing out on anever-ending rally.

Until Friday last week, when US

stocksdropped bout 2 per cent, mar-a

kets’ inclination was to respond to sell-

offs by deploying a game plan that

worked well in 2019 and early 2020,

including in response to shocks such as

the US missile attackthat killed a top

Iranian general and the disruption to

half of Saudi Arabia’s oil production.

For the previous year, investors

quickly bought every dip in the belief

that the latest shock would prove tem-

porary, contained and reversible.

Now, the multiyear gap between ele-

vated asset prices and weaker economic

conditions is becoming nsustainable.u

The global economy and markets are

getting closer to the neck of a T-junc-

tion. What comes after that involves a

stark contrast, depending on how poli-

cymakers respond.

One way involves recession, financial

instability and even more complicated

politics; the other, a genuine growth

process that validates elevated asset

prices in an orderly fashion and opens

the way for more constructive politics.

If investors nsist oni uying dips, theyb

should ifferentiated more by favouring

higher quality issuers with strong bal-

ance sheets. They should void swap-a

ping US assets for more international

exposure, which s much less resilient toi

global economic weakness.

For the remainder, hey should con-t

sider that this latest shock to fundamen-

tals could prove severe enough to dis-

lodgethe bullish market conditioning

that has been ritical to thisc stock rally.

Given that the negative economic

effects of the virus are yet to be suffi-

ciently absorbed by markets, this allsc

for much greater immediate attention

to potential vulnerabilities in portfolios

in the form of equity and liquidity risk.

Mohamed El-Erian is Allianz’s chief

economic adviser

Coronavirus should

snap investors out of

‘buy the dip’ mindset

Markets are getting closer

to the neck of a T-junction.

What comes after that

involves a stark contrast

FEBRUARY 4 2020 Section:Markets Time: 2/20203/ - 19:13 User:stephen.smith Page Name:MARKETS2, Part,Page,Edition:LON , 24, 1